Broadly speaking, franchise due diligence should be a two-pronged process. On the one hand, prospective franchisees or investors should consider the qualitative side of the business. On the other hand, they should also explore the quantitative side as well. With regard to the former, aspects to examine include online reviews and general reputation status, pending, current or future litigation against the franchisor, levels of professionalism, etc. And regarding the latter, a franchisee should carefully study the financials behind the investment to determine whether the business model is sound and how soon (within reason) they can expect to make returns on their investment.
In the process of franchise purchasing due diligence, studying qualitative and quantitative criteria is vital. However, it’s also beneficial for a prospective franchisee to have meaningful discussions and an in-depth understanding of the business prior to committing. These discussions should take place with the franchisor and/or their representatives, third parties such as current or former franchisees in the network and finally, it’s important to get an idea of the business and its model through evaluating online, third-party forums for reviews to gauge the franchisor’s industry reputation.
Before signing the franchise agreement and when doing due diligence, there are important “red flags” to look out for. Among these include the following:
Franchise due diligence will depend greatly on the franchisor and the franchise opportunity in question. Typically, however, the process can last anywhere from 10 to 30 days, depending on the volume of information a prospective franchisee has to examine before making the final decision.
Failure to carry out due diligence before investing in a franchise could be costly for a prospective franchisee or investor because it could mean that promises of high returns on investment are not fulfilled, there is a poor relationship and lack of support from the franchisor (which could have been identified early on), it could lead to loss of resources and time and it’s a way of making an uninformed decision without knowing whether the risk to invest is worth it.
Getting help with franchise due diligence is highly advisable. Many professionals in the industry can help with the process, including getting help from franchise lawyers, accountants and franchise consultants.
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